KKR and Nasdaq Plan Market to Trade Shares in Private-Equity Funds

Rob Copeland broke the news that private-equity firm KKR & Co. was planning to allow investors to sell parts of their stakes in buyout funds through a private market run by Nasdaq OMX Group Inc. Smaller investors would be able to purchase slices of shares valued for as little as tens of thousands of dollars which is far lower than the millions of dollars typically required to get a piece of these buyout funds, according to sources. The venture also could include other private-equity firms that are now in discussions to sign up.

The story as it appeared on Dow Jones:
April 24, 2014 7:22 PM EDT: KKR, Nasdaq Discuss Market to Trade Shares in Private-Equity Funds

Private-equity firms are letting a few more patrons past the velvet rope.

KKR & Co. plans to allow its investors to sell portions of their stakes in buyout funds through a private market run by Nasdaq OMX Group Inc., thought to be the first time pieces of these exclusive vehicles have been traded this way in the U.S., said people familiar with the matter.

Giant pension funds and wealthy individuals will be able to sell to smaller investors slices valued at as little as tens of thousands of dollars, far lower than the millions of dollars typically required to get a piece of these buyout funds, according to the people familiar with the outlines of the new market.

Other private-equity firms are in discussions to sign up for the Nasdaq market alongside KKR and may commit before it officially opens, the people said.

Under this structure, the firms would enable existing investors to cash out earlier than usual, and the buyout shops would open themselves up to a broader range of investors.

KKR is likely to file regulatory paperwork to allow trading of fractional stakes of its funds as soon as this month, one of these people said.

Private-equity firms buy companies, typically using hefty amounts of debt, with plans to improve operations and sell them for a profit. The firms raise billions of dollars from big investors such as pension funds for vehicles that finance acquisitions, but they typically ask them to leave their money in place for a decade or more.

Some $360 billion was distributed to investors in 2013 from the range of long-term investment funds that can be described as private equity, according to estimates from Triago, a firm that advises such funds.

The move to encourage trading of smaller slices is part of a push by so-called alternative asset managers to reach a new group of investors. Hedge funds and private-equity firms, once exclusive to institutions and wealthy individuals, are increasingly trying to attract a broader market through various products for so-called retail investors.

A handful of private-equity firms, including KKR and Carlyle Group LP, already list their shares on public stock exchanges. But those listings offer retail investors shares in the parent companies rather than individual buyout funds.

The new market would still be relatively exclusive: It would only be open to accredited investors, the people familiar with the plans said, or those individuals with $1 million in wealth, not including their primary homes. And investors looking to sell any of their stakes in a buyout fund first must get permission from the private-equity firm that runs the fund, these people said. It is unclear whether KKR will allow investors to trade stakes in all its funds.

Still, an entry point in the tens of thousands of dollars would be far lower than the normal buy-in for a buyout fund, which is often $10 million or more. The seller will likely set the price, some of the people familiar with the matter said, with the value likely to be at a slight discount to the asset value. Investors will likely be able to sell their stakes with as little as a month’s notice, compared with the often-decadelong commitment at many private-equity firms.

“The playing field is certainly leveling. Previously, typical buyers of private-equity stakes were large institutions and multibillion-dollar secondary funds. Not anymore,” said Suchita Nayar, North American head for brokerage firm Tullett Prebon PLC.

Private-equity firms, like hedge funds, appeal to investors in part because they often purport to be less correlated to world stock markets than are many other SHYinvestments.

Many hedge-fund firms have already launched mutual-fund versions of their flagship products aimed at mom-and-pop investors, and assets in the products have been growing rapidly.

Private-equity firms also have been increasingly paving a path to the public. Last March, Carlyle began allowing investors to put as little as $50,000 into a collection of its buyout funds through an intermediary.

KKR, founded by cousins Henry Kravis and George Roberts in 1976, is one of the blue-chip names in the industry, but it has stumbled before in trying to reach a broader customer base. In 2012, it rolled out two relatively-high-fee mutual funds for individual investors, but it decided to close them earlier this year amid tepid interest. Much of the money in both of the funds at the time of their closure was seed cash from KKR. The firm still operates a closed-end mutual fund, started last year, with about $300 million of assets under management.

Historically, investors in private-equity funds have sold stakes in an informal secondary market, where record volume is expected in 2014.

For its part, Nasdaq has been eager to expand beyond stock and options trading. Last month, Nasdaq launched its Private Market LLC arm, a San Francisco-based exchange for trading shares in private organizations, including stakes in pre-IPO companies.

Shares of KKR buyout funds in the new marketplace aren’t expected to begin trading until at least the second half of the year. The entire operation must still be approved by regulators, including the U.S. Securities and Exchange Commission.

Separately Thursday, KKR and Nasdaq each released quarterly earnings. KKR reported a first-quarter profit of $210 million, or 65 cents a share, up slightly from a year ago. Nasdaq profit more than doubled, to $103 million, or 56 cents a share, helped by a favorable year-ago comparison.

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